Year-end Summary and Comments on Proposed Market Structure Reforms
Highlights & Recent Developments
- Retail volume grew 154% year over year in 2022
- Midpoint volume grew 201% year over year in 2022
- NBBO price setting instances increased 257% year over year in 2022
- MEMX options exchange build is well underway
- Market structure advocacy remains a priority as equities investors face the prospect of the most meaningful market changes in decades
In 2022, MEMX grew and diversified the liquidity on the equities platform by partnering with our members and adding features. Some highlights from the last year include:
- Retail volume grew 154% year over year to $193 billion, with firms benefiting from high fill rates on non-marketable limit orders.
- Midpoint volume grew 201% year over year to $165 billion, with high levels of midpoint liquidity available in thousands of symbols throughout the trading day.
- NBBO price setting instances increased 257% year over year with NBBO-setter market share ranging from 11.2% to 14.1% in the second half of the year.
- The SEC approved MEMX’s rule filing to launch an options exchange and the build is well underway.
- MEMX became the exchange technology provider for EDX and Dream Exchange.
Equity Market Structure
Below we compare three of MEMX’s market structure positions to the SEC’s recently announced proposals.
- Accelerating round-lot reform on the exclusive SIPs
MEMX has been advocating for the acceleration of round-lot reform adopted in the 2020 market data infrastructure rule (MDIR). We’ve estimated that this could save investors up to $2 billion a year in reduced spread costs, and are pleased to see the SEC’s proposal to expedite these reforms. The proposed rules would also require the exclusive SIPs to update their systems to support the dissemination of market data in actual shares rather than representations of round lots. For example, 40 shares of an NMS Stock priced at $300 would be shown as “40” shares instead of “1” round lot. Odd-lot quotation information, as defined in MDIR, would also be made available on the exclusive SIPs prior to the implementation of competing consolidators, including the best odd lot order (“BOLO”), i.e., a national best bid or offer (“NBBO”) equivalent for the best priced odd lots.
- Tick size and access fee reform
Based on data-driven analysis, MEMX has recommended a $0.005 increment for tick-constrained stocks and a commensurate 50% reduction in the access fee cap per share from $0.0030 (30 mils) to $0.0015 (15 mils) in those stocks.
The table below shows the SEC’s proposed changes in price increments and access fees in yellow. The minimum pricing increments would apply to both quotes and trades, with harmonized increments for trading on both exchanges and off-exchange venues.
The proposal would reduce the access fee cap to $0.0010 (10 mils) for transactions in all NMS stocks priced equal to or above $1, except for securities subject to the smallest minimum increment ($0.001), which would instead be subject to a lower access fee cap of $0.0005 (5 mils). Transactions in NMS stocks priced less than $1 would be subject to a lower access fee cap of 0.05% of the value of the quotation price. All exchange fees and rebates must be “determinable at the time of execution.”
The SEC’s proposed changes would be phased in over five quarters as shown in the table below. The changes in the first and second quarters most closely resemble MEMX’s recommendation, but would subject a broader group of stocks to narrower increments and a lower access fee cap. Generally, MEMX continues to support a more measured approach to collect data, assess real-world impacts, and minimize the costs of unintended consequences (e.g., less displayed liquidity and wider spreads in some securities).
- Handling of marketable retail orders
In 2022, the SEC disapproved MEMX’s proposal to introduce a new retail midpoint program designed to provide an opportunity for retail investors to receive substantial price improvement at the midpoint, while allowing institutional and other investors to interact with retail order flow on a national securities exchange. These goals are remarkably similar to the policy objectives for the SEC’s order competition proposal, which would generally require that retail orders not executed at midpoint be exposed to qualified auctions on exchanges or lit ATSs (with at least 1% market share) before they could be executed internally at wholesalers, subject to exceptions for orders entered by more active retail customers (40 average daily trades or more) or larger orders (at least $200,000 notional).
In addition to significant restrictions that limit the venues that can offer qualified auctions for retail orders, under the SEC’s proposal, such auctions would be subject to a number prescriptive requirements related to speed (duration between 100-300 milliseconds), price increment (at least $0.001), fee/rebate caps ($0.0005 per share), transparency (auction message disseminated on consolidated market data feed), and other conditions/restrictions (e.g., no priority given to fastest auction response or broker-dealer that routed the order).
As discussed in a recent comment letter, we urge the Commission to think carefully about how its statutory authorities can be used to facilitate continued innovation and competition in the capital markets. Before engaging in broad efforts to reshape the U.S. equity market through its rulemaking authority, the Commission should consider how these same policy objectives can be fulfilled by permitting innovation by national securities exchanges rather than mandating the use of specific mechanisms by market participants.